January 19, 2011
On Monday the federal government announced their intention to crack down on the rising debt problem. They implemented three new measures to curb rising household debt including shorter amortizations, reducing the value of a home that can be refinanced, and rescinding government insurance on home equity lines of credit.
And the mortgage industry is saying it’s a bit harsh. But do keep in mind– it’s the mortgage industry. Of course they’re going to say that.
But let’s at least explore their argument. First of all, they said that 79% of Canadian mortgages have fixed interest rates (and most of those mortgages are locked in for longer than five year). That leaves 21% of people exposed to interest rate risks in the next few years. The mortgage industry says “that’s not so many”. I say, 21% is a lot. When you’re talking on a macro level 21% is anything but negligible. I don’t mean to be hyperbolic, but US unemployment during the Great Depression was 25%. And that was the Great Depression.
Their second point is that the gross debt service ratio is 19.6% (about 13-15% lower than the standard expected by lenders). Are you asking “what the hell is that?” Well, it adds up the mortgage payments and property taxes on a home and divides it by the homeowner’s income. My question, since there’s definitely been a trend toward condominium living lately, why aren’t condo fees included in this metric? How much would it change if they were?
The third point, as outlined by the Financial Post, is:
…the average total debt service, which includes all debt payments divided by household income, was only 28.9% for variable rate holders, below the 45% demanded by banks. CAAMP says if rates go up one percentage point the ratio would increase to 33.7% on average, but only about 800 to 950 mortgages funded last year would fail to qualify under the higher rate.
That’s a fair point.
The report concluded by saying that housing demand is likely lower than it needs to be. (How predictable…that the mortgage industry would say housing demand is lower than necessary).
I think the federal government definitely did the right thing. I don’t think there’s a bubble– but it’s better to be safe than sorry. I mean, we’re not playing Monopoly here (if we were then my coveted strategy is to buy anything I land on even if I become indebted to other players). And, either way, Canadians were going a bit crazy with debt. The debt to income ratio is at a record high of 148%. In my opinion, that’s the bottom line.